Sterling broke a six-month trendline against the dollar this week, pushing GBP/USD to multi-week highs near 1.3550 as inflation figures kept the greenback below the 100 mark on the Dollar Index.
Inflation data keeps the dollar pinned
The pair spent most of Tuesday trading sideways around 1.3500, a level it had struggled to hold in earlier sessions. By midweek, GBP/USD climbed to 1.3530, its highest point since mid-July, after U.S. inflation numbers matched expectations and avoided the hawkish surprise traders anticipated.
July’s Consumer Price Index rose 0.1% month-over-month, matching forecasts, while the annual rate slowed to 3.4%. Core inflation, excluding food and energy, remained at 2.5%. The figures did little to alter Federal Reserve policy expectations, with markets now pricing a 48.1% chance of a 25-basis-point hike in September, down from 70% a week earlier.
That shift followed July’s weak nonfarm payrolls report, which showed a 23,000-job decline against forecasts of an 80,000 gain. The dollar’s softness in response became the main driver of sterling’s recent strength, though this could reverse if U.S. data improves.
For now, the lack of a hawkish surprise in inflation data removed immediate risk of a dollar rebound. However, the report’s composition still allows Fed officials to maintain caution. Energy prices rose 14.7% year-over-year, with gasoline up 24.6%, while shelter costs contributed two-thirds of July’s monthly increase. Airline fares also jumped 2.2% from June, indicating persistent inflationary pressures in services.
The Fed’s July policy statement had already highlighted upside risks, and comments from Chair Kevin Warsh reinforced concerns about inflation’s persistence. That hawkish stance remains intact, even without fresh catalysts for dollar strength. As a result, sterling’s gains were modest—around 20 pips on the day—rather than the larger move that might have followed a more dovish print.
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A structural shift in the trendline
The real story isn’t the inflation data but the technical breakout that came before it. On August 7, GBP/USD cleared a descending trendline that had capped rallies since January’s 52-week high. That line, drawn from the January 28 peak, had defined the pair’s decline for six months, acting as resistance during every recovery attempt.
The breakout wasn’t immediate. The pair had been building momentum since late July, when it found support near 1.3420. A rally into early August pushed it toward 1.3520, but resistance near 1.3480 held until the payrolls report shattered the trendline. Since then, GBP/USD has moved within an ascending channel, with higher lows at 1.3420, 1.3465, and now 1.3479.
The policy backdrop adds complexity. The Bank of England has kept its benchmark rate at 3.75%, with three members of its Monetary Policy Committee voting for a hike in the last meeting. The Federal Reserve sits at 3.50%-3.75%, with an identical three dissenters pushing for tighter policy. That leaves the rate differential at zero against the Fed’s ceiling and 25 basis points in sterling’s favor against its floor—a shift from 2024, when the dollar consistently held a yield advantage.
This change reflects broader economic adjustments. The U.S. labor market has cooled, with the July payrolls report showing a 23,000-job decline. The UK economy, meanwhile, is projected to grow 1.1% this year. That divergence hasn’t fully priced into the market—consensus still targets GBP/USD at 1.3327 for September—but the trendline break suggests traders are reassessing.
Whether this marks a temporary reprieve or a longer-term reversal remains unclear. Sterling’s recent strength stems more from dollar weakness than its own fundamentals. If U.S. data continues disappointing, the pair could extend gains. But if the Fed’s hawkish stance regains influence, the dollar’s pullback may prove short-lived, dragging GBP/USD back toward 1.3400 or lower.
Resistance and support levels to watch
The immediate ceiling for GBP/USD sits at 1.3530, the August 10 high. Beyond that, 1.3547 is the next hurdle, just 17 pips higher. Clearing that level would open the door to 1.3600, a 70-pip move from the current consolidation zone. No major horizontal resistance exists between 1.3550 and 1.3600, which could allow for a rapid advance if momentum holds.
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Support is more densely packed. The first key level is 1.3479, a flipped resistance line from late July. Holding above it maintains the bullish bias. Below that, 1.3456 is critical—a daily close below it would invalidate the near-term uptrend. Further down, the 20-day EMA at 1.3437 and the 60-day EMA at 1.3403 provide additional layers of support.
The 14-day relative strength index stands at 61.1, above the midpoint but below the overbought threshold. This leaves room for further gains, especially if the dollar stays under pressure.
The next test arrives with UK GDP data. If sterling holds above 1.3500 through those reports, the path to 1.3600 becomes more plausible. But if the dollar regains strength, the pair could quickly retreat toward 1.3400, erasing recent gains.
The trendline break defines the current setting. It marks the first time in six months GBP/USD has escaped its descending resistance. Whether this leads to a sustained rally or a temporary reprieve depends on upcoming data and the Fed’s ability to counter the dollar’s weakness.
Recent movements align with broader market trends. Revenue growth in major sectors has shown similar volatility, reflecting shifting economic conditions.
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